Video franchising fight: Swiftly changing market creates regulatory challenges

Raymond Gifford and Philip J. Weiser, Special to the News

Published December 10, 2005 at midnight

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This year's version of the telecom regulatory wars is the debate over local video franchising. In the 1970s when MCI entered long-distance markets, AT&T complained that it "cream-skimmed" by entering only the desirable markets. In the wake of the Telecommunications Act of 1996, incumbent Bell companies like Qwest cried foul when competitive local phone companies engaged in "cherry-picking," targeting the business market and not residential consumers.

Now, it's the local cable companies that invoke such arguments, maintaining that without imposing local franchise requirements identical to theirs on all new video entrants, there will be "cream-skimming," "redlining" and regulatory asymmetry in video markets.

Ex-Denver City Council President Cathy Reynolds invoked this tired refrain in her Dec. 3 op-ed "Qwest's end run" by excoriating Qwest for allegedly wanting to skim Denver's cream in offering video service after previously complaining that new entrants in the telephone market were doing the same thing.

The response to Reynolds' argument is that policymakers were right to ignore Qwest's complaint about cream- skimming as to entry in the local telephone market, and they should also turn a deaf ear to claims that Qwest's selective entry into local video markets is somehow unfair.

For consumers, additional competition promises benefits in the form of lower prices, higher quality and greater choice. Any steps that would discourage additional entry - such as mandating the pace or form of entry - only undermine this goal.

The real challenge for policymakers is to consider how to update a model for local franchising that still bears its 1970s pedigree. Video markets are rapidly changing, and with the Internet's impact on video programming only beginning, they are about to face a radical reorientation.

Some states, like Texas, have already enacted a statewide system for authorizing entry into the video market by telephone companies, and Congress is looking at comprehensive reform measures as well.

The goal of these reform efforts should be to encourage more entry, unburden cable incumbents' from unnecessary regulations, and develop more effective means of addressing any relevant policy objectives. Calling for protracted negotiations over local franchises that address all aspects of a telephone company's video-service offering accomplishes none of these goals.

To Reynolds, the best approach is to mandate that new entrants in video markets follow the same franchise model as their cable predecessors. But such a course ignores that the policy goal of extending service to all is already satisfied by the requirement long imposed on cable incumbents.

From the perspective of the localities, they deserve compensation for the use of their rights of way and have the prerogative to regulate that access, but that regulatory oversight should be exercised prudently and not so as to impede entry that will benefit consumers.

To be fair, cable companies are not without legitimate concerns. From their perspective, telephone companies are looking to gain a regulatory advantage over them, i.e., no requirement to serve potentially unprofitable customers. Unfortunately, a fair accounting of the benefits and burdens of being a cable incumbent as opposed to a telephone entrant in the video market is a mighty task and probably undoable.

Consequently, unless cable companies can propose constructive options for measuring and compensating them for this legacy burden to serve all customers, the better course is to welcome new entry free of artificial "build-out" requirements.

The clear trend in telecommunications policy - at least since the commitment to allow competition against the old AT&T Bell System - is to remove barriers to entry and welcome competition. Time and again, this policy has benefited customers, including the recent efforts by Comcast to enter the local telephone market with their Digital Phone product.

Notably, Comcast is under no regulatory obligation as to how it must roll out this product and does so when and how it makes business sense.

Over time, both Comcast and Qwest will increasingly migrate away from their pedigree as cable companies or telephone companies and instead will act as communications companies, offering consumers broadband, video and voice services.

In this converged marketplace, regulation needs to adapt, moving away from a model that mandated outcomes to one that facilitates competition and protects consumers from unfair trade practices. How to accomplish that goal is a debate worth having. To move onto that debate, however, we must embrace a commitment to the new model and let go of old regulatory requirements born of a bygone monopoly era.

Raymond Gifford is president of the Progress & Freedom Foundation, a market- oriented, Washington, D.C.-based think tank that studies the digital revolution and its implications for public policy. Previously he was chairman of the Colorado Public Utilities Commission. Philip J. Weiser is associate professor of law and telecommunications at the University of Colorado, executive director of the Silicon Flatirons Telecommunications Program, and co-author of Digital Crossroads: Telecommunications Policy In The Internet Age (MIT Press 2005).

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